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Investment – Are You in Danger of Raising a Toxic Investment Round?

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Fundraising for an early stage technology startup is always a challenge. You have to navigate many meetings with potential investors and hopefully reach agreements that make everyone happy so you can continue to work in good faith after the negotiations are over. However, in some cases, after the dust has settled in a negotiation, it isn’t always a win-win for everyone.

For example, what do all the following company circumstances have in common? (note: all these companies are real early stage companies.)

  • A founder who gave away > 60% of his company for 100K in funding in tranches.
  • A founder that gave away > 75% of his company to his ‘investors’ in a pre-series A round.
  • A company that gave away > 70% of their company for < 100K to investors, but still wanted to go through an accelerator.
  • Another company with 51% ownership to existing investors.
  • Another company where the investor offered the founders a sub €30K investment but it came over tranches across the year (as in no cash right now).

As you read the above examples, you might find these offers as ’normal’ (then this post will hopefully help you think twice in the future about these kinds of deals), or you might reel in shock as you read each one of the above anecdotes. Either way, in this post I want to highlight the concept of a ‘Toxic round’ or a ‘Toxic cap table’ in an early stage startup to help founders navigate potential investment offers and avoid getting themselves into a difficult situation in the future.

What is a ‘toxic’ round?

‘Toxic’ rounds (not a technical term) can be defined as fundraising rounds that can pre-dispose a company to  struggle to find subsequent financing because newer investors shy away from a potential investment once they find out what the state of the company’s current cap table and or governance.

Whilst it is very hard to make any judgments about the quality of investors because each company’s financing history is unique, a common view is that investors that ask for terms such as those highlighted above are usually not of the sort that one wants to take investment from. However, the focus of this post isn’t to highlight the qualities of ideal investors (if you want to read more about the ideal qualities of a new investor check out this text), but rather why subsequent new investors might shy away from investing in your company if you have taken on this kind of round in the past. Additionally, in this post I’m only focusing on founder dilution and not on other potential aspects of a company’s shareholdership that could make it difficult for new investors to invest.

Therefore, the reasons why a new investor might shy away from a company that has experienced a ‘toxic’ round in the past can include:

  1. Because the company will likely require more capital in the future should it prove successful, and potential new investors feel that the founders will be less motivated to stick with the company as the value of their equity declines over time through premature excessive dilution.
  2. New potential investors feel that current investors own too much of the company and perhaps the company has a governance issues as a consequence.
  3. Because the investors have a large stake, it brings up a lot of questions about how the company got itself into this situation. Did it happen through a down-round? Was it due to other negative circumstances which could affect the future of a new investment? The circumstances raise a lot of questions and doubt in a new investor, and considering how many investment options an investor receives per year, frankly, as a founder raising capital you just don’t need any more reasons for a new investor to reject you.
  4. In the specific case of ‘debt’ or an ‘early exit of existing investors as part of a new financing’; potential new investors can sometimes object to having the money they are putting in as part of a new round be used for anything other than to expand the growth of a company. This means, potential new investors may shy away from companies that have investors that are eager to dump their shares as part of the financing transaction or companies that have too much debt outstanding that is repayable as part of an upcoming round.

Having said the above, how do you more precisely define a toxic round? Well, a toxic round could be where either “too much money” comes in too early at a too low a valuation, or where a company is too under-valued, or both. All of these cases lead to founders being greatly diluted too early in their company’s life.

To help you visualise these potential scenarios, let’s look at the following equations:

  1. Money Raised / Post Money = % dilution to founders
  2. Money Raised / (Pre Money + Money Raised ) = % owned by the new investors

These two equations represent the same thing, the only thing that changes is the definitions, but the numbers are all the same. If you don’t know what Pre or Post money mean, check out myrecent blog post which defines some of the components of a round.

What is the solution for toxic rounds?

Knowing the above, it would seem that the solution for toxic rounds would include both raising the right amount of money AND setting the right valuation for the company early on so that as the company grows, it doesn’t find itself in a ‘toxic’ situation. If you want to read more about how much money to raise and setting the right milestones check out my following posts below:

So if that solves the ‘Money Raised’ part of the equation, how about the valuation parts of the equation (pre-money)? Valuing an early stage company is always a source of much debate and causes many people lots of stress. As I’ve described on my previous blog posts on the subject:

There are many methods one can take to arguably ‘price’ a company. However, the larger point is that no matter what method you use, it will always be subject to current market dynamics… meaning that no matter what “quantitative” method you think you are using, it is subject to the variability of how the overall market is trending… if we are in a boom, the pricing will likely be higher, if we are in a bust, it will likely be lower. It’s a simple as that.

Taking these market dynamics in consideration, take a look at a recent Fortune blog post on what the average dilution hits are in the USA for Series Seed, A, B, and C rounds. In the Fortune post, you can see the average dilution per round for the typical rounds and you can see the market dynamics over the years (check out what the 2007 recession did to % dilution per round). What you realise is that none of these rounds, no matter how big, take as much equity as the real life examples I noted above at the start of this post. Even if you consider that different countries have different country risks, the range of numbers is a multiple of 3x what is recorded over the last 6 years in the USA.

What if your investment round was toxic?

So what if you’re already in a tricky situation similar to the examples I noted above? If you find that you are in the situations described in this post, unfortunately the available solutions aren’t always easy and straightforward. The single best solution is to have a tough talk with existing investors on how to rectify the situation before new investors either walk away or make it conditional as part of their new investment. There can be many ‘creative’ solutions to solving the problem with your investors, such as investors giving back equity if founders hit milestones, but they will all seem ‘creative’ to a new investor rather than ‘clean’ if not completed before they invest; hence why the ideal solution is to work through this topic with existing investorsand help them understand that by not helping you overcome the situation, they very well may be jeopardising the long term value of their own investment. Perhaps counter-intuitive, but true. In the end, any progress you make with existing investors on fixing these situations if you are already in them, is better than no progress, no matter how tough the discussions.

I leave with you with the following thought of prevention for you to discuss with your potential new investors if they offer you a hard deal… yes, they are taking a huge risk by investing in your early stage startup, but by taking too much equity or debt too early, are they really just pre-disposing your company to failure? Something to discuss.

Originally Posted at Netocratic.com: http://netocratic.com/toxic-investment-round-2451

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Model Equity Calculator for Founders with Option Pool Expansion

English: Historical valuation on the secondary...

SeedCamp’s hackathon, Seedhack, took place at Google Campus, London, on the 8th to 10th of November. It brought together some of the brightest talent in the startup community from 15 countries with one of the best accelerator programs in the world and mashed it up with awesome content providers like Twitter, Facebook, BSkyB, BBC, Getty, HarperCollins, EyeEm, Nokia Music and Imagga. There were a total of 12 teams working on interesting and exciting projects.

As part of this hackathon, Ali and Will helped me aggregate resources to help founders better understand the process of raising equity and the impact it can have to their founder stakes. We aggregated resources to help entrepreneurs to understand  the numbers and implications of raising money and giving out equity. Valuing a company and calculation its impact on your equity is a very complex and confusing for entrepreneurs as well as being far from an exact science, this is the pain point that we wanted to address.

In the words of Seedhack attendee Will Martin (@willpmartin)

“Fundraising is one of the most difficult parts of the startup world, as first time founders this is an even more daunting process. Experience of raising a round and understanding the numbers and implications of that round and the related equity issued to an investor as well as employees in the form of an option pool is vital, but sadly is only fully understood by going through the process for real. Our intention was to give founders the knowledge required by being able to go through the process in a simple and easy way, thus giving the founder the confidence when it happens for real.

Ali and I are first time founders currently actively looking for investment. We know the total value we need in terms of money we want to raise as well the percentage of equity we are comfortable willing to give up to the investor. What we didn’t know and learned through the process is the implications in future rounds as a result of that initial funding round. Having an option pool for employees, advisors, board members etc. is something that complicates the issue and is often a requirement in the terms an investor is offering. This complicates the issue for the founder, so being aware of the impact of their shareholding as a result is vital for a founder as it is them that gets diluted in the first round but also any subsequent round, but it is often overlooked.

The changes to equity positions of the founders, investors, employees etc. is very important to understand as it dictates control and value of a company. Having this knowledge now gives us as founders a huge advantage over other founders we are competing with for funding and bridges the knowledge gap that exists for first time founders.”

In order to read some of the terms on this cap table model, below are some definitions which you might find useful:

Pre & Post Money Valuation

“The pre-money valuation is the valuation that a company goes into raising a round of financing with. By establishing this valuation, it helps investors understand what amount of equity they will receive in the company in exchange for their capital. Once the financing round has been completed, the post-money valuation is the sum total of the pre-money valuation plus the additional capital raised. So, if the pre-money valuation of a company is $10 million and they raise $2.5 million from investors, their post-money valuation would be $12.5 million. Investors would own 20% of the resulting company.” – Dave Morin, Source Quora

“A PRE-MONEY VALUATION is the valuation of a company or asset BEFORE investment or financing. If an investment adds cash to a company, the company will have different valuations before and after the investment. The pre-money valuation refers to the company’s valuation before the investment.

External investors, such as venture capitalists and angel investors will use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneur and his or her startup company. This is calculated on a fully diluted basis.

If a company is raising $250,000 in its seed round and willing to give up 20% of their company the pre-money valuation is $1,000,000. (250,000 * 5 -250,000 = 1,000,000)

Formula: Post money valuation – new investment

Source – http://en.wikipedia.org/wiki/Pre-money_valuation

A POST-MONEY VALUATION is the value of a company AFTER an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity.

The Post-money valuation is the sum of the pre-money valuation and the money raised in a given round. At the close of a round of financing, this is what your company is worth (well, at least on paper).

If a company is worth $1 million (pre-money) and an investor makes an investment of $250,000, the new, post-money valuation of the company will be $1.25 million. The investor will now own 20% of the company.

The only reason it’s worth spending time on this term at all is that it “sets the bar” for your future activities. If your post-money after your first round of financing is $4 million, you know that to achieve success, in the eyes of your investors, any future valuations will have to be well-in-excess of that amount.     

Formula: New Investment * total post investment shares outstanding/shares issued for new investment. “

Source – http://en.wikipedia.org/wiki/Post-money_valuation

Option Pools

“An option pool is an amount of a startup’s common stock reserved for future issuances to employees, directors, advisors, and consultants.” – from startuplawyer.com

Option pools can also be formed by Restricted Stock Units, but whichever one you use, they are generally still called ‘Option Pools’.

The OPTION POOL is the percentage of your company that you are setting aside for future employees, advisors, consultants, and the like. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.

“The size of the Option Pool as a percentage of the POST-MONEY Valuation and where ALL of it comes from the founder’s equity. This is the least founder-friendly way to present this, but it is also the point at which most early stage investors will start the negotiations. The expectation from traditional venture firms is that this will equal 15%-25% of the company AFTER they make their investment. The Option Pool is one of the most complex and, from the entrepreneur’s perspective, confusing terms in an equity financing scenario.” – source http://www.ownyourventure.com/content/tips/op.html

Round Size – 

The investment, or money is how much money is raised in a given round of financing. However, the decisions (and their implications) surrounding this number are among the most important that a founding team makes. It is not just about how much money is raised, it is about the terms that the money is raised on and, maybe most importantly, whose money it is and what they bring to the table in addition to money.  – Source http://www.ownyourventure.com/content/tips/inv.html

Link to the Model Cap Table: http://bit.ly/1ayKk8p


NOTE FOR MODEL TO WORK – It needs to run on Excel (Google docs coming soon) and with circular calculations turned on. This can be done by going to (Mac Excel) Preferences -> Calculation -> Iteration -> Click on Limit Iteration

If you are considering using Convertible Notes as part of your round, check out this variant of the cap table with notes on how to convert as well: http://bit.ly/17kHlSA

Additional Equity Calculation Tools (Thanks to Ali Tehrani for finding these – @tehranix) -

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This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

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Must See Videos on Developing a Solid Value Proposition for your Customers

Determining your customer and the value prop you offer them is essential early in the creation of your business. Without doing so, you really will struggle in hitting product market fit. Below are two videos to really jog your thinking about the process.

This first video is by Michael J. Skok, long time entrepreneur, lecturer at HBS, Startup Secrets blogger,  and currently Partner at Northbridge Ventures.

hard link: https://www.youtube.com/watch?v=EYJeGYboPnw#t=2019

Another great video is of “Understanding the Job” your product is hired to do by Clayton M. Christensen. He is the Kim B. Clark Professor of Business Administration at the Harvard Business School (HBS), with a joint appointment in the Technology & Operations Management and General Management faculty groups. He is best known for his study of innovation in commercial enterprises. His first book, The Innovator’s Dilemma, articulated his theory of disruptive innovation. Christensen is also a co-founder of Innosight, a management consulting and investment firm specializing in innovation. (Wikipedia)

hard link: http://www.youtube.com/watch?v=f84LymEs67Y

Lastly, here is another video which is really to drive the whole point of ‘Why’ you are doing things for your customers… it is one I’ve posted before from Simon Sinek, but always worth watching again.

hard link: http://www.youtube.com/watch?v=qp0HIF3SfI4

Seedcamp

10 Tips for Succeeding in a Startup Accelerator Program

Article originally published on the SiliconRoundabout on July 4th, 2013

Accelerators come in all different shapes and sizes. With many new Accelerators coming into existence within the last few years, the job of selecting one to join and getting the most out of your chosen accelerator program isn’t always obvious. Some programs, like Seedcamp, cater to high ambition & high growth companies spread across various industries, whereas others focus on specific verticals such as clean energy or healthcare to name a few.

We all have different approaches, but with over 90 companies forming the Seedcamp family we’ve had a chance to see many different industries and what it takes to get those companies to the next level.

Below are Seedcamp’s top tips for succeeding before you enter a accelerator programme:

1) Asses Program Fit – Research what an accelerator’s deal is regarding investment and terms before applying. perhaps your company isn’t ready yet or is too mature for the program you are considering.

2) Do your Due Diligence – Get in touch with founders or mentors that are part of the program, read blog posts from the Accelerator’s team to see what is important for them. This will help you get a better feel for the program but also how the program leaders think.

3) Rehearse your Pitch and prepare to answer questions – Be transparent, confident, and open. If your pitch isn’t ready or you are defensive in your approach, it’ll be a huge red flag.

 Once you enter the program:

4) Be Proactive – Don’t wait for the Accelerator’s team to chase after you, you should chase after them and if you can, be as physically close to the team as possible..

5) Understand your startup is more than just techFinding Product-Market-Fit is crucial at this stage of the game. Don’t focus entirely on tech, embark on a mission to learn and master all the commercial aspects of your startup as well.

6) Attend as many of the curriculum events as possible – They are there to help you. Don’t skip valuable content.

7) Network as much as possible – email all the people you meet and get to know as many of the Accelerator’s mentor base as possible.

8) Build a board of advisors from your networking efforts early. They will be of incredible value

9) Start developing your fundraising strategy after the first week of being in the program

10) Lastly, don’t be afraid to experiment and ask questions – You will have lots of people supporting you. Your mantra should be ‘test test test’ – and that applies to all aspects of your company.

 

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The Basics, Pros & Cons, Points to Consider, and The Modelling of Convertible Notes

note

Special thanks to Dale Huxford from Orrick, Herrington & Sutcliffe LLP for edits and additional legal review.

UPDATED (Nov 11, 2013) – Notes added on: Conversion Triggers section & attached Cap Table in folder updated to v2 to fix some bugs.

The “Convertible Note” gets lots of attention in the blog-o-sphere as an alternative to traditional equity financings; some of this attention is good and some of it bad. Some investors refuse to use them, while others love them as a quick way of getting a company the capital it needs.

Convertible notes are sometimes viewed as a “best of both worlds” compromise from both a company perspective as well as from an investor’s perspective: on the one hand, a note is a loan, so the investor enjoys more downside protection than would an equity holder in the event the company is forced to wind up or dissolve for whatever reason; on the other hand, if the company eventually raises money by selling shares to later investors in a typical early stage financing round, then rather than pay back the outstanding amount in cash, the principal and interest are “converted” into shares of stock in the company (usually at some sort of discount off the price offered to new investors – I’ll discuss that below). In other words, the investor enjoys the downside protection typically associated with debt lenders, but is also positioned to enjoy the upside opportunity typically enjoyed by equity holders.

As with any tool, before you use it effectively, its best to understand the pros and cons of each of its features and how they can be used for your individual circumstances. Fortunately, convertible notes typically have fewer moving pieces than do equity instruments (which explains, in part, why they’re sometimes favoured by early stage companies and investors – the negotiation and documentation for a convertible note round is likely to be far less time-consuming and costly than for an equity round), but before we proceed any further in dissecting this tool, let’s look at the headline basics of a convertible note:

1) Total Amount Raised by the Note – This amount does have a natural limit. Think about it this way… you have an amount ‘outstanding on your cap table’, that will be part of an upcoming round. If a new round in the future isn’t particularly big, having too much money outstanding can create a problem with your convertible note holders taking up too large a portion of that round. Example: a 300K convertible which converts as part of a total 600K seed round would loosely mean that the convertible note holders would have 50% of the round. If the round was supposed to be for 20% of your equity, that means your new investor will only get 10%, an amount that may not excite him that much… and also you only get 50% new money in the door. To limit the extreme cases of this being done, investors usually create a ‘qualified round’ definition within the Note’s terms for conversion (see bullet #5 below) which reduces the likelihood of this amount being disproportionally larger than a new investors amount as part of a new round.

2) Discount Percentage – Simply put, if shares are worth $1 a 20% discount percentage would mean that an investor would get the shares for 80 cents. For cases where the next round’s valuation is below your convertible note holder’s cap as set in point #3 below, a discount factor will yield the convertible note holder a marginally cheaper price for having taken a risk on you. Typically this discount percentage is likely to be between around 15-25%. Another Example: a round closes at 3M. Your cap is at 5m. Your convertible note holders have a 20% discount, so they get to convert into the next round at a valuation of 2.4M.

3) Limit On Company Valuation At Conversion (the so-called “Valuation Cap”) – In order to calculate the number of shares into which the outstanding balance on a convertible note will convert, you must know the price at which the next round’s equity securities are being sold. Price per share, as you may or may not know, is calculated by taking the company’s pre-money valuation (negotiated at the time of the equity financing between the company and the investors) and dividing that number by the total number of outstanding shares in the company (the company’s “fully diluted capital”). Recall, however, that convertible notes are typically entered into in anticipation of an equity financing round – thus, at the time a convertible note is issued, no one knows what the negotiated pre-money valuation will be if/when the company undertakes an equity financing. Consequently, no one knows exactly what the price per share will be at the time the notes are issued. This creates uncertainty and is a cause for some investor anxiety, particularly for those investors concerned that that the number of shares into which their note may convert may be insignificant relative to the other shareholders, particularly in the event the pre-money valuation at the time of conversion is especially high.

The valuation ‘cap’ is intended to ease investor concerns by placing a maximum pre-money valuation on the company at the time of conversion. with the use of a cap, an investor can effectively set the minimum amount of equity an investor is willing to own as part of having participated in your convertible note round. For example, if you have a 200K note on a valuation 5m cap, then the worst case scenario for that convertible note holder, would be 4% equity after the new round is over. A typical valuation cap for very early-stage companies will be around $4m – $6m, with most companies at the Series A level settling on $10m valuation caps or more. For more statistics on caps and other components of a convertible note, I have included a link at the bottom of this post to an article with additional stats.

One thing to note, is that in the USA, there is a rising prevalence of uncapped notes. Clearly this is a founder friendly outcome, and if possible, always nice to get. The flip-side, is that for the investor, the may feel a bit ‘unprotected’ in the case of where the company does exceedingly well and thus their amount converts to a much smaller percentage than originally hoped.

4) The Interest Rate on a Note – A convertible note is a form of debt, or loan. As such, it usually accumulates interest, usually between 4-8% between the point when you sign it and when it converts. This amount is usually converted as part of overall amount at the next round. For example, if you have an annual interest rate of 8% and you have a Loan Note of 100, then you’d convert 108 after a year.

Note: In the US, it’s highly advisable to include an interest rate, even if it’s simply a nominal amount equal to the applicable federal rate (most recently at less than 1%), b/c if not, then any amount that could have been earned via interest is taxed to the company as gain. So it’s not really an option to exclude it in the USA. In the UK, you don’t necessarily need to include it should you wish to omit it.

5) Conversion Triggers – The point of a convertible note is for it to convert at some point in the future, not for it to stay outstanding indefinitely. As such, it will likely have a series of triggers for conversion. One I mentioned earlier is the next ‘qualified round’. Basically this means that the round is big enough to accommodate the amount in the note (without washing out new investors) and also is the type of round that is typical for the next step in the company’s growth and will give the note holders the types of rights they’d expect for their shares once converted from loan to equity. Another conversion trigger is an expiration maturity date, whereby the note holder typically can either ask for their money back (although this rarely happens) or basically seek to convert the outstanding amount at that point. There are more types of conversion triggers that note-makers can add to a note, but these are the basic ones. Update: upon a change of control event in the future and before the convertible is converted, investors can sometimes ask for a multiple of their loan back as payment in lieu of converting to ordinary shares prior to the completion of the change of control event. You can see some examples of this in the wording of the attached examples later in this post.

Again, these are the headline terms of a convertible note, and not representative of all the terms. However, for early discussions with potential investors, you’ll rarely have to talk about anything more than 1-4. Beyond that, you usually start having to involve lawyers (or experienced deal drafters) to help you finalise the document.

Now that we’ve reviewed the basics of a Convertible Note, take a look at a recent report that has statistics of what common terms have been given to Valley based companies. If you are not in the Valley, you will likely have a different set of averages, so be mindful of that.

http://www.siliconlegal.com/reports/seed-financing-report-2010-2012

Now, let’s look at the headline pros and cons of using a convertible note.

Pros -

  • Typically less involved and less paperwork than equity rounds; can cut down on time and legal fees
  • Investors enjoy downside protection as debtholders during the earliest stages of the company when company is at critical growth stages
  • Company can defer the negotiations surrounding valuation until later in the company’s lifecycle (i.e. for very early stage companies at the earliest stages of planning and preparation, valuations can be more difficult to define)
  • At conversion, note holders typically receive discounts or valuation caps on converting balance, thereby rewarding the earliest investors appropriately for their early investment in the company but without causing valuation issues for the company

Cons -

  • If a convertible note is made to be too large, it can negatively impact your next round because it’ll convert to a disproportionally large portion of your next round, effectively crowding-out your next round’s potential investors from having the equity stake they may desire.
  • If a convertible note’s cap is made too low, in order to accommodate a larger round later, the Founders may need to take the additional dilution that would happen if they exceeded the convertible’s cap.
  • Because a convertible note can be made to be quite versatile, sometimes investors can add clauses in there that have greater implications down the road, such as being able to take up more of a future round than the actual amount they’ve put in, for example.
  • If not careful, you can accumulate various too much convertible debt which may burden you at a conversion point
  • Doesn’t give your investors (in the UK) SEIS tax relief, thus making it less attractive than an equity round. There may be some workarounds, but generally SEIS and Convertible notes are not seen as compatible.
  • Notes give convertible note holders the investor rights of future investors (say in a future Series A Preferred Shares), which may include more rights than those they would take for the amount of money they put in had they simply done an equity deal on Ordinary Shares with you today.
  • If the convertible note automatically converts at the next equity raise (i.e. the investor has no choice), investors may wind up being forced to convert into securities shares despite not being happy with the terms of the equity financing. The note holders may unfortunately have less influence in negotiating the terms of the equity financing, which partially explains why some investors are reluctant to invest with convertible notes.
  • Finally, while convertible notes allow the company to defer the valuation conversation until a later time (see discussion under “Pros” above), any inclusion of a conversion cap will raise a similar conversation, which defeats some of the purpose for why companies and investors alike originally favoured the convertible note as a quick-and-easy financing solution to begin with.

Now let’s explore a few more core concepts in detail.

Seniority - A convertible note is a form of debt or loan. Although its not too common to hear about investors asking for their money back, they in fact, do have that right… additionally, one of the privileges that having the Note act like debt is that it acts senior to equity in the case of a liquidation. What this means in practice, is that Loan holders will get their money back first.

Subscription Rights – Some investors like to have more equity than their invested amount would likely yield them upon conversion. So one thing to look out for is how much they want to take up of the next round as part of having been in the convertible note. Example: An investor gives you 50K, which converts at your next round of 1m on 2m Pre at 1.6% -> next to nothing for the convertible investor. However, that investor had a Subscription Right for up to 30% of the new round, so that allows him to participate on the 1m round with up to 300K thus affording him a larger ‘seat at the table’ in excess of the 1.6% he would just have without this right.

To conclude and to provide you with some practical examples, in the following Google Drive Folder I have added an excel sheet with an example cap table as well as UK & USA termsheet templates from Orrick* that are uberly simple, for review purposes only (they may not be fit for what you need, but give you an idea). A comment on the example cap table – it isn’t designed to be ‘fully realistic’ per se, as in, your cap table will likely not look like this in terms of founders and shareholders and number of rounds before a convertible comes in, but it serves well for you to play with the variables that make up a convertible note so you can see how they affect your fully-diluted stake after a round.

I hope this helps you decide what the best options may be for you. As usual, please give me feedback on all these materials as with software, there are likely bugs somewhere!!  Thanks in advance!

*Regarding the Convertible Note Documents, a disclaimer from Orrick: The linked documents have been prepared for informational purposes, and are not intended to (a) constitute legal advice (b) create an attorney-client relationship, or (c) be advertising or a solicitation of any type.  Each situation is highly fact specific and requires a knowledge of both state and federal laws, and anyone electing to use some or all of the forms should, prior to doing so, seek legal advice from a licensed attorney in the relevant jurisdictions with respect to their specific circumstances.  Orrick expressly disclaims any and all liability with respect to actions or omissions based on the forms linked to or referenced in this post, and assumes no responsibility for any consequences of use or misuse of the documents.

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